Only Half of Eligible Employees Participate in Tax-Favored Retirement Plans

Overall participation in tax-favored retirement plans remained stable at 50% between 2000 and 2003, a participation rate slightly less than in 1997, according to a new report from the Congressional Budget Office (CBO).

Moreover, the CBO notes that participation has shifted slightly toward older, higher-income, secondary earners in two-earner married couples, and nonearning spouses in one-earner married couples in an update of its “Utilization of Tax Incentives for Retirement Saving (2003).”

The decline in participation, although small for all groups, was largest among taxpayers under age 30. Their participation, at just 35%, the lowest of any age group in 1997, fell by 3 percentage points, to an even lower 32% in 2003. The 30 – 44 age group’s rate of participation fell from 58% to 56% during that time, and the age 45–59 group saw a decline in average participation from 64% to 63% during that period. The CBO noted that for those aged 60 and over, the participation rate in 2003 was just 44% – but that was a 2-percentage-point increase over 1997 for that group.

Between 2000 and 2003, participation in employment-based plans increased by just 1 percentage point, to 46%, but that increase occurred only for 401(k)-type plans, including 403(b)s and 457s. From 1997 to 2003, participation actually decreased by 1 percentage point, with a 3-percentage-point drop in noncontributory plan participation more than offsetting a 2-percentage-point increase in 401(k) participation.

The average 401(k) contribution in 2003 was $3,257 (in 1997 dollars), an increase of approximately 7%, compared with the year 2000. However, despite the higher contribution limits allowed under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), that rate of growth fell short of the nearly 10% growth experienced between 1997 and 2000, according to the CBO.

Income Tacts

Workers with income over $80,000 participated at a higher rate in 2003 than they did in 1997, according to the report. The highest participation rate, 82%, was for those earning between $120,000 and $160,000 – a group that had an 81% participation rate in 1997. Participation among earners with the highest income was slightly lower, at 79%, compared with 77% in 1997. In contrast, participation by those with income between $20,000 and $40,000 dropped by 3 percentage points.

Among workers with income between $40,000 and $80,000, participation dropped by 2 percentage points between 1997 and 2003.

Participation increased among two marital status/earner roles dominated by women: secondary earners (up 3 percentage points between 1997 and 2003, to 57%) and nonearning spouses (up 3 percentage points, to 9%). Unmarried earners and sole earners participated at rates 1 percentage point lower in 2003 than in 1997. The group with the highest participation rate in 1997—primary earners—registered a 72% participation rate in 2003 – identical to 1997’s rate.

Limits Less?

In 2000, 6% of participants in 401(k)-type plans made contributions at the $10,500 limit or at the Section 415 limit of 25% of compensation. Absent EGTRRA, the 402(g) dollar contribution limit would have increased to $11,500 in 2003, and, assuming the contributions actually observed in that year, the CBO report said that 9% of participants would have been constrained by that limit. Imposing the general $12,000 cap allowed under EGTRRA, however, constrained only 8% of participants. Increasing that limit for participants age 50 and over by $2,000 reduces that number to 6%. Finally, increasing the percentage-of-compensation limit from 25% to 100% under EGTRRA reduces to 5% the percentage of contributors constrained by the limits, according to CBO.

The report noted that while the EGTRRA changes reduce the percentage constrained by contribution limits in all age groups, it did so particularly in the 60-and-over age group, for which the proportion declines from 14% to 5%. Those changes had the least impact in the 30–44 group (the percentage constrained drops by just 2 points, from 8% to 6%). Not surprisingly, the percentage constrained declines in every income group, but the effect is greatest at the high end of the income scale. According to the report, in the $120,000–$160,000 income group, the percentage constrained falls from 26% to 16%, and in the $160,000-and-above group, it drops from 52% to 37%.

Increasing the limits on contributions to 401(k) plans reduced from 9% to 5% the proportion of participants constrained by the limits. The CBO report says that approximately half of that difference was the result of introducing $2,000 catch-up contributions for participants age 50 and over, with the rest attributable to increasing both the general dollar limit and the percentage-of-compensation limit on contributions.

The report is online at